A taxpayer cannot be stopped from entering into a bona fide transaction which, when carried out, has the effect of avoiding or reducing tax liability, provided that there is no provision in the law designed to prevent that avoidance or reduction of tax. This principle is clearly brought out in Ayrshire Pullman Motor Services and DM Ritchie v IRC at 763-4: “It is trite law that His Majesty’s subjects are free, if they can, to make their own arrangements so that their cases may fall outside the scope of the taxing acts. They incur no legal penalties, and strictly speaking, no moral censure, if, having considered the lines drawn by the legislature for the imposing of taxes, they make it their business to walk outside them. “No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for purposes of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, as far as he honestly can, the depletion of his means by the revenue.”
There is an important distinction between tax evasion and tax avoidance. Tax evasion refers to the illegal activities deliberately undertaken by a taxpayer to free himself from a tax burden. Tax avoidance, by contrast, usually denotes a situation in which the taxpayer has arranged his affairs in a perfectly legal manner, with the result he has either reduced his income or has no income on which tax is payable.
Section 98 of the Income Tax Act [Chapter 23:06] targets transactions, operations or schemes which have the effect of avoiding, reducing or postponing the payment of tax. For the section to be invoked, such avoidance must have been in the Commissioner’s opinion, the sole or one of the main purposes of the scheme. If these requirements are fulfilled, the Commissioner must show that the scheme must be tainted by “abnormality”. Section 98 may therefore be viewed as a combination of three tests, the first two being the avoidance effect and purpose respectively and the third, abnormality test. Tax authorities, naturally, tend to invoke tax avoidance provisions only where a tax avoidance effect has already been perceived. The cases accordingly turn on the questions of purpose or abnormality. SIR v Geustyn, Forsyth and Jourbert (1971) 33 SATC 113 concerned a company with unlimited liability formed to take over the business of consulting engineers formerly carried on in a partnership by its three directors, who were also shareholders in the company. I acquiring the business of the partnership, the company undertook to employ the three former partners at a certain salary and to pay the partnership an amount for their goodwill equal to three years’ profits of the partnership. There were no service contracts and there was no guarantee for payment of the goodwill. The latter was credited to interest-earning loan accounts of the former partners. It was found that it was not the sole or main purpose of the conversion from a partnership to a company to avoid tax. The onus of proof that the sole or main purpose was not tax avoidance, however, rests upon the taxpayer himself. CIR v Louw (1983) 45 SATC 113 dealt with the incorporation of a professional partnership of consulting engineers. One of the results of the incorporation was that the shareholders’ income by way of salaries and dividends was considerably less than their income as partners; another result was that, after a time, the shareholders borrowed the surplus funds of the company by way of interest-free loans.
The Court viewed the incorporation of the partnership and the subsequent granting of loans as independent transactions and, while finding that the incorporation was safe from the ant-avoidance provisions, it held that the loans were vulnerable to the application of the provision. The incorporation of a partnership was found not to be abnormal, but the granting of loans to shareholders instead of their receiving salaries as employees was considered to be abnormal. The Commissioner is empowered, as he thinks fit, to assess either as if the scheme had not taken place or in such a manner as he considers appropriate in order to prevent or diminish the avoidance.
The other provisions in the Income Tax Act whose effect serve as a counter to tax avoidance are section 23 (1), 24 and Schedule 2. Section 23 (1) provides that, where a person carrying on a trade in Zimbabwe either (a) purchase property (movable or immovable) at a price in excess of the fair market price or (b) sells at less than the fair market price, the Commissioner may determine a fair market price for the purposes of that person’s assessment.
Section 24 deals with transaction where there is a foreign element of management, control or capital, and the Commissioner considers that the condition between the connected parties differ from those which would arise between parties at arm’s length. The Commissioner is then empowered to determine, on an arm’s length basis, the taxable income of any party carrying on business in Zimbabwe.
In Schedule 2, provisos to paragraph 4 and 12 deal with the situation where a taxpayer has disposed on non-farm trading stock ad farm trading stock respectively, in various ways, such as donation, and the Commissioner is of the opinion that tax avoidance was the sole or main purpose of such disposal. The Commissioner is empowered to determine the amount to which the stock would have realized had it been sold in the ordinary course of trade and to include such amount in the taxpayer’s gross income.
Recent Comments